Sentiment Risk Premia in the Cross-Section of Global Equity
72 Pages Posted: 28 May 2020
Date Written: May 16, 2020
This paper introduces a new sentiment-augmented asset pricing model in order to provide a comprehensive understanding of the role of this new type of risk factors. We find that news and social media search-based indicators are significantly related to excess returns of international equity indices. Adding sentiment factors to both classical and more recent pricing models leads to a significant increase in model performance. Following the Fama-MacBeth procedure, our modified pricing model obtains positive estimates of the risk premium for positive sentiment, while being negative for negative sentiment. Our results contribute to the explanation of global cross-sectional average excess returns and are robust for fundamental factors, momentum, idiosyncratic volatility, skewness, kurtosis, and international currencies.
Keywords: Asset pricing, behavioral finance, financial markets, investor sentiment, sentiment risk premium
JEL Classification: C53, G12, G41
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